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Wednesday, 29 July 2015

A little over four months ago I established a US$90-110 range for the US biotechnology company Gilead (link here) since when the stock has not breached the lower bound but in the last couple of months has risen above the upper level.

Undoubtedly this performance has been helped by a general 'enthusiasm' for the sector which has manifested itself in some high sector valuations - although not on a relative basis by Gilead.

So long story short I let my position run ahead of yesterday's (Tuesday's) after hours update...and what an update it was. Of course the chart which got my immediate attention was the guidance one:

So let's get this right: on a mid-point basis higher sales, higher margins and lower taxes...that sounds like a positive combination and worth a 5%+ upgrade.

However the most impressive part of the numbers was the underlying quality. On the conference call the greatest focus was on the HCV rather than the HIV division (an interesting evolution over the last couple of years) and in the former space not only were new product launches hugely net sales generative...

...but further sales extensions are apparent as the international roll-out of the Harvoni product increases apace:

HIV treatment share remains very high...

...and growth potential (unfortunately) also is still clearly apparent:

With the company also confirming that there is very limited likelihood of a large material acquisition the continued extension of recently initiated dividend and buyback strategies remains the most likely scenario which - given the low relative rating and growth potential - feels only value adding to the share.

Given some of the vagaries around the biotechnology space on purpose I was a little ungenerous in my valuation targets during my note of around four months ago linked above. Given progression in both the numbers and the story pushing through a 10% upgrade to my top of the range level to c. US$125 does not feel particularly aggressive, making at worst Gilead a strong 'hold'.